Is Russia’s virtual economy reappearing thanks to the sky high interest rates and economic slowdown?

The virtual economy was the bane of the Yeltsin-era. The term was coined by economists Barry Ickes and Clifford Gaddy in the mid-1990s to describe a system where the payments system collapsed thanks to hyperinflation and companies survived by using a barter system. At the same time as no one had any cash, wage arrears exploded and workers were paid in product; in one famous case, the Akhtuba regional factory paid its staff in dildos, the Moscow Times reported at the time.

Ironically, the collapse of the 1998 financial crisis re-monetarised the economy, which bounced back, kicking off a decade long boom. But signs that the virtual economy might be back are apparent in the banking sector today.

Cash is in short supply again as thanks to the sky high interest rates, it is highly profitable for banks to sit on clients’ money and pay as late as they can, driving up company debt and wage arrears. The same sort of schemes were rife in the 1990s and made the bank billions of dollars of profit. In those days the scam was very similar: convert clients’ money to dollar and delay payments as long as possible. In the meantime hyperinflation and a collapse meant that when the bank was finally forced to pay, while the nominal value of the payout had not changed, the amount of dollars that needed to convert back was vastly reduced. Banks became cash cows that made their oligarch owners mega-rich.

The Central Bank of Russia (CBR) is struggling to bring rates down, but despite seven rounds of cuts of a total of 500bp in the last year, the prime rate remains at a crushing 15% against an inflation rate of just under 6%. That makes simply depositing money in an interest bearing account highly profitable – more profitable than the bulk of normal investments a bank or company can make. And thanks to the sophisticated deposit insurance scheme, those profits are guaranteed, backed by the state’s reserves.

Instead of performing their traditional role of financial mediation – taking clients money and lending it out to companies so they can invest and grow – the opposite is happen: banks are sucking cash out of the system and sitting on it for as long as they can, adding to the economic slowdown and increasing pressure on the increasingly dysfunctional payment system.

Company debt record

Overdue payments owed by Russian companies to contractors have risen above RUB8 trillion for the first time, The Bell reports, thanks to mounting strain in the corporate sector caused by the elevated borrowing costs rippling through the economy.

Outstanding arrears reached RUB8.2 trillion ($88bn) in January 2026, up 21% from a year earlier and 2.5-times the level of five years ago, according to Rosstat data. The total amounts to 3.8% of Russia’s GDP, up from 2.4% at the start of 2022.

The Bank of Russia has kept monetary policy tight in an effort to contain inflation fuelled by labour shortages, wartime spending and sanctions-related supply disruptions.

The CBR has been reacting by imposing fines on banks for delaying payments, but the administrative penalties have done little as the profits are bigger than the fines. Government procurement rules set fines in the range from RUB50,000 to RUB100,000 for legal entities —a negligible cost for companies with multi-billion turnover. Russia’s Chamber of Commerce and Industry recently called for a “significant” increase in penalties, according to Vedomosti.

Businesses say state-owned companies are among the worst offenders. A source at one group said in March 2025 that payments to counterparties could be delayed for “three to six months”.

The Russian Union of Industrialists and Entrepreneurs (RSPP), the oligarch lobbying group, said 42.3% of large companies identified counterparty non-payments as the main constraint on operations by the end of 2025, a new record. In the first half of the year, that was down to 26% to 27% of respondents.

The pressure is particularly acute in infrastructure construction. The road contractors’ association NAIK told the government that receivables owed to members rose 147% year on year in the first quarter of 2026 to RUB500bn, according to Russian Unified Biometric System (RUBC) cited by The Bell. Including “frozen” revenue — completed work for which certificates have not been signed — the figure reaches RUB696bn.

The association said companies were “effectively lending to the state at their own expense” and warned of the risk of cascading bankruptcies within one to two years.

The government has established a task force on non-payment to small and medium-sized businesses under Economy Minister Maxim Reshetnikov. Proposals discussed include higher fines, electronic procurement certification, a seven-day payment deadline for SMEs and linking payment discipline to executive KPIs at state-owned companies.

The Centre for Macroeconomic Analysis and Short-Term Forecasting warned in late 2025 that the current surge in defaults caused by rising rates was already comparable to the 2022 shock when the payment system last collapsed in the first months of the Ukraine war, and in manufacturing had exceeded it.

In the meantime, the CBR is cutting rates as fast as it can, but the increase in the VAT rate by 2pp this January will slow that effort down this year. The CBR is expected to cut rates again at the next monetary policy meeting in April, but the cuts will remain incremental and a huge 1000bp cut would be needed to close the very large gap between interest rates and inflation, which is not going to happen.

A return to a barter economy still a long way off

Yet for all the strain, Russia is still some way from a full return to the 1990s-style virtual economy. Unlike the late Yeltsin period, there remains ample liquidity in the system, wages are still being paid in cash, and the state retains the fiscal capacity to inject funds into banks, defence contractors and regional budgets when needed. The payments system is under pressure, but it has not seized up yet.

What is reappearing instead is a softer version of the same pathology: money is circulating faster even as confidence in holding it falls, thanks to high inflation expectations, according to the last CBR survey. Economists measure this through the velocity of money — how quickly cash changes hands. In Russia, broad money velocity appears to have risen over the last year, not fallen, after a collapse in the immediate aftermath of the Ukrainian invasion. Households and companies are spending balances more quickly as inflation expectations remain elevated and ruble’s purchasing power is mistrusted.

That increase in velocity should not be mistaken for economic health. In a normal expansion, faster money circulation can reflect stronger demand and productive investment. In Russia’s case it is increasingly a symptom of stress. Companies are rushing to deploy working capital before costs rise further, while consumers are taking their spare money and locking it into high value products that can easily be resold. The same thing happened in the 1990s when it made more sense to hold household wealth in the form of washing machines and cars than cash (unless you could get dollars).

There is an old joke from those days: “Things are bad. Things are really bad. Things are so bad it’s time to sell some dollars.”

In the meantime, the banks remain motivated to drain liquidity from day-to-day commerce.

A two-speed monetary system is now in operation. It’s not yet the barter economy of the 1990s, but a more modern distortion: plenty of money in theory, too little usable cash in practice.